American Taxpayer Relief Act —
A Closer Look
Now that the flurry of the year-end fiscal cliff negotiations has passed, taxpayers are digging into the details of the American Taxpayer Relief Act of 2012 to get a better idea of how it affects their personal and business taxes. Here’s a closer look at some key provisions.
For 2013 and subsequent tax years, the 10%, 15%, 25%, 28%, 33%, and 35% income-tax rates will remain in place. However, a higher 39.6% rate will apply to income over a specified amount: $400,000 for single taxpayers, $450,000 for married taxpayers filing jointly, $425,000 for taxpayers filing as head of household, and $225,000 for married taxpayers filing separately.
The new law brings back provisions limiting itemized deductions and phasing out personal exemptions, effectively increasing the rates higher income taxpayers pay. The itemized deduction and personal exemption provisions are triggered when income exceeds $250,000 (single), $300,000 (married filing jointly), $150,000 (married filing separately), and $275,000 (head of household).
The alternative minimum tax (AMT) has trapped a growing number of taxpayers each year, and it promised to ensnare millions more middle-income taxpayers in 2012 unless Congress again enacted a “patch.” The new law providespermanent AMT relief, retroactive to 2012, by increasing the AMT exemptions and indexing them for inflation. The 2012 AMT exemption amounts are $50,600 for unmarried taxpayers, $78,750 for married taxpayers filing jointly, and $39,375 for married taxpayers filing separately.
Capital Gains and Dividends
Starting in 2013, single taxpayers with income over $400,000 ($450,000 for married taxpayers filing jointly, $425,000 for heads of household, and $225,000 for married taxpayers filing separately) will pay a 20% rate on most long-term capital gains and qualified dividends. For other individuals, the top rate remains fixed at 15% (0% for those in the two lowest brackets).
Estate and Gift Taxes
Instead of falling to $1 million as scheduled, the amount exempted from estate and gift tax will stay at $5 million, indexed for inflation. The top estate- and gift-tax rate rises from 35% to 40% (rather than 55%) after 2012.
Business Tax Breaks
For tax years beginning in 2012 and 2013, business taxpayers may elect Section 179 expensing for more of their qualifying asset purchases — up to $500,000 each year, subject to phaseout as qualifying asset purchases exceed $2 million. In addition to equipment and other items normally eligible for expensing, certain real property can qualify. The new law also extends 50% bonus first-year depreciation, generally through 2013, and temporarily revives the research credit, the work opportunity tax credit, and certain other tax credits important to businesses.